Mundell: US dollar still be here in 90 years

PUBLISHED : Thursday, 20 January, 2011, 12:00am
UPDATED : Thursday, 20 January, 2011, 12:00am

The US dollar's status as the world's reserve currency was likely to remain unchallenged in the foreseeable future, a Nobel prize-winning economist said yesterday.

And no matter how strong China's economy became, the yuan would not come close to challenging the greenback until it was fully convertible, Professor Robert Mundell (pictured) told about 150 bankers and executives gathered at the JW Marriott, Pacific Place, yesterday.

'The US dollar will not disappear in at least another 90 years,' Mundell said at a lunch co-hosted by ANZ and the Asia Society. To act as a reserve currency, the issuing country must not only have a strong economy but the currency must also be highly liquid, Mundell said.

'China's economic growth has been strong in recent years. But since the yuan is not yet fully convertible, it does not have enough liquidity worldwide. The US dollar has always been freely convertible, which allows people to freely trade the currency. The liquidity of the US dollar is huge and this is why many countries, including China, treat it as their reserve currency.'

Though Mundell placed his trust in the US dollar for now, in the longer term, he said, the economic growth of China and India would strengthen their currencies and central banks would consider keeping them as part of their reserves.

Mundell criticised US lawmakers' attempts to press China to allow the yuan to strengthen. There have been demands for a 20 per cent rise in the yuan's value against the US dollar amid claims Beijing is keeping the yuan artificially low for trade reasons.

'The appreciation of the yuan will lead to hot money inflow into China, leading to an asset bubble and inflation. I do not think the yuan should appreciate but the country should encourage more domestic spending to cut the trade surplus,' he said.

Mundell, dubbed the father of the euro for his role in the creation of the currency, said there should be a fixed range of trading between the US dollar, euro and gold price to achieve currency stability, adding that the world needed to consider some variant of the gold standard.